Diversifying Macroeconomic Factors — For Better or for Worse

54 Pages Posted: 8 Jan 2021

See all articles by Livia Amato

Livia Amato

University of Chicago - Booth School of Business

Harald Lohre

Robeco Quantitative Investments; Lancaster University Management School

Date Written: August 31, 2020


It is widely acknowledged that asset returns are driven by common sources of risk, especially in challenging times when the benefits from traditional portfolio diversification fail to realize. From a top-down perspective, investors are mostly concerned about shocks in growth or inflation that ultimately govern the pricing of broad asset classes. To this extent, we propose a natural asset allocation framework to achieve a diversified exposure to orthogonal macro risk factors and to harvest the associated long-term premia. We examine the role and usefulness of different types of macroeconomic variables, as systematic sources of risk or state variables that drive time variation in the asset returns, and compare their diversification potential across different states of the world.

Keywords: Macro Factors, Factor Investing, Diversification, Markov Switching

JEL Classification: C34, E44, G11, G12

Suggested Citation

Amato, Livia and Lohre, Harald, Diversifying Macroeconomic Factors — For Better or for Worse (August 31, 2020). Available at SSRN: https://ssrn.com/abstract=3730154 or http://dx.doi.org/10.2139/ssrn.3730154

Livia Amato (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

Harald Lohre

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3011 AG

Lancaster University Management School

Lancaster LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/lums/people/harald-lohre

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